LONDON, April 24th (LPC) – Banks that raised large European leveraged loans prior to last month’s close have rejected offers from direct lenders to buy some of the financing and mitigate banking risk, preferring to take the paper to keep as it is also the private money is expensive.
A number of banks hold around ten buyout financings with a total volume of over 10 billion Europe’s leveraged loan market was almost closed to new issues in mid-March when the pandemic took its toll.
The outstanding buyout funding covers a wide variety of sectors including Cerelia, a French company that makes pizza dough and cookies; British supplier of music mixing consoles Audiotonix; German pharmaceutical manufacturer PharmaZell; Thyssenkrupp elevator division; French mortgage broker Financiere CEP; Britain’s Stonegate Pub; and BASF’s construction chemicals business.
Even funding that was in syndication was postponed in March, including a $ 1.61 billion acquisition loan.
Since there was no immediate exit route, direct lenders turned to banks to take over some of this financing and deploy large cash reserves for new opportunities. Direct lenders usually don’t look to B Term Loan Syndication because the expected return is too high unless banks are unable to move papers for borrowers who are perceived to be riskier.
Securing papers on many of these pending transactions would be very lucrative for the direct lenders as the companies are viewed as high performing companies despite the negative impact of Covid-19. Many of the companies should be back in good health after the pandemic ends, several bankers said.
While banks typically attempt to sell every deal they write within a three-month period, they are holding onto the paper for the time being in the hope of launching syndication processes across the board to mainstream investors.
“Direct lenders are snooping around like optimistic hyenas trying to get some meat. The herd of borrowed loans does not contain the sick or the elderly and is therefore not isolated and prey to them, ”said a syndicate chief.
Since many of the outstanding loans were drawn up before Covid-19, they contain very competitive conditions from the banks in terms of economy and documentation.
Direct lenders charge a premium to CLOs and loan funds and likely want a price that is outside of a bank’s flex protection, from over 6% to 6.5% at 97 OID. When a bank sells external flex protection, it loses money.
“Direct lenders ask if they can be ‘helpful,’ but ‘helpful’ is a euphemism at best because they want a huge discount. Banks closed the deals as they were considered good credit so they do not want to get involved as it is not the time to sell as it is too expensive and due to the flexibility. Banks say no because they are not foreclosed, ”said the head of the syndicate.
While the European leveraged loan market is still closed to initial issuance, there are positive signs that the market could open up to the right loan in the coming weeks.
The Swedish alarm company Verisure has opened the European leveraged market after a break of almost two months. Successful $ 200 million senior secured floating rate bond issue “There is a belief that the market will come back and credit will survive this crisis, so no one sits and thinks they have to sell now,” said the syndicate chief.
While banks are avoiding direct lenders for now, the goodwill granted by banks’ credit committees to leveraged finance desks will not be unlimited.
If the market pause lasts too long, there will come a point where banks will have to turn situations, even if it means a blow.
“Everyone is kind of compassionate at the moment, we feel like we are all together as nobody saw this coming and it is unprecedented. There is a little space and goodwill to get through the shutdown time and people are flexible and willing to do that. Three months later, if there are still problems, people will be less lenient, ”said a second syndicate chief. (Adaptation by Christopher Mangham)